70% Correction in San Diego

[powayseller]

Local Market Monitor, a real-estate market research provider writes
in this CNN article that SD homes are 70% overvalued.

This is a new thread to continue the previous one, where folks were questioning my assertion that housing prices are 50% overvalued.

PMI’s study finds SD housing 22% overvalued.

Rich Toscano, never giving a figure of the percentage decline, lands in favor of a serious price decline, and finds the soft landing scenario unlikely. In the Bubble Primer, a graph shows that “the ratio of home prices to incomes is 64% above historical average”.

More from Rich:
“If prices were to permanently flatten out right now, given current wage growth, it would take over 16 years for home prices to get down to the historical average of 9 times income, and 23 years for prices to get down to the historical post-boom low point of 7.5 times income. Keep those figures in mind the next time someone tells you that home prices “will just flatten out for a while until incomes catch up.”

It should be noted that if incomes were to start growing significantly faster than they are now it would not take so long for home prices to get back in line. However, such wage inflation would in all likelihood be accompanied by rising mortgage interest rates. Which brings me to the next area of concern.” {he goes on to explain that rising rates would lead to foreclosures because 80% of recent buyers stretched into adjusting mortgages and won’t be able to make those higher payments}
….
Southern California’s economic dependence on both continued brisk housing activity and ever-increasing home prices poses a major risk to the soft-landing scenario….And given all the risks facing Southern California housing, it is clear that a serious price decline is a much greater probability than most people expect.”

END OF QUOTE

[John F]

70% overvalued and 70% correction are not equivalent statements.

If a house is presently worth 170k but its intrinsic value is 100k the property is 70% overvalued. But a drop back to 100k is a 41% correction.

An analogy is a stock increasing in value by 100%. A 50% reduction takes you back to the original value and a 100% reduction takes you to zero.

Sorry to be anal but your headline exaggerates the situation.

Take care

[sdduuuude]

In the 8 years from 1990 to 1998, when the price-to-income ratio decreased by 30%, what was the actual % median price reduction ?

[Bugs]

Price declines were uneven. No price range was exempt, but some did worse than others. I saw some segments that only declined by 15% and other than declined by as much as 45%. 20% – 25% declines were pretty common. The outlying areas got hurt the worst, areas like La Jolla and Rancho Santa Fe got hurt the least. But no area escaped – there was no safe haven during the last bust.

[sdduuuude]

I’m talkin’ median county-wide price, specifically.

[sdduuuude]

John F – you’re my hero.

In Rich’s graph, a reduction of 37% would bring the chart back to the median, but only if it happened instantaneously. If it takes 5 to 7 years, if incomes rise with inflation, it would take less of a reduction.

[sdduuuude]

Thanks, Rich. How come you don’t plot this Case-Shiller Index regularly? Sounds useful.

[davelj]

I found a graph that has the median in 1989 at about $190K and the median in 1986 at about $160K which amounts to a 16% decline in nominal terms and (of course) a lot more in real terms. Condos got hit a lot harder.

My guess is this time around we’ll decline by 30% or so from peak to trough and I think we’ve already hit the first 10% decline if the stats were correctly reported/adjusted.

As much as I’d like to see things completely implode, there’s a BOATLOAD (many $billions) of well-heeled/institutional investment money sitting on the sidelines waiting for problems in the residential market that will come into that market if prices decline by more than 30% which will put a floor on the decline. It’s shocking how much unlevered liquidity is sloshing around on this planet. That’s the only reason I don’t see 40%-50% declines coming, despite evidence that they probably “should”. Also, history suggests that the uber-bears are almost always wrong, just as the perma-bulls always ending up getting their clock cleaned every few years. In markets, things tend to be “never as good as you hoped, nor as bad as you feared.”

[davelj]

disregard.

[davelj]

and again…

[davelj]

Also, if you were to draw a trendline of median San Diego prices starting at 1980, and excluding the period 2002-2005, you’d come up with an estimated median price of about $350K. Instead we hit the peak at around $600K, so you’d need a 42% immediate decline from that point to get to $350K. But, if you assume a 30% decline from peak to trough over 3-5 years and another 5 years of flattish prices, the long-term trendline reestablishes itself around 2015. Consequently, there’s no “need” for prices to drop by 40%-50% in order to mean revert if you assume several years of flattening prices. Just a thought.

[powayseller]

Thanks, I need to pay more attention to the percentage stuff. You’re absolutely right!

[powayseller]

If we get institutional investors buying SFH, this would change the decline significantly. Is this realistic? They look for billions to invest, do you think they would buy up a bank’s REO division and deal in individual properties?

If we didn’t have negative savings rate, highest level of personal debt, stagnant wages, and exotic loans, I would vote for a 15% drop. But all the factors I mention, esp. the exotic loans resetting and resulting foreclosures, are making me the ueber-bear.

Another concern: from where come the high wage jobs to save the economy? There is no new buzzword on the horizon. It used to be high tech, then biotech. Lately, the headlines are ominously silent…..

[JJGittes]

If so, this decline could mirror the last one in terms of the % decline. i.e. about a 5-6 year slump with prices declining 15%, along with inflation taking up the remainder of the slack. Not pretty, and it probably will be much worse in outlying areas, but it is not doomsday either.

[Bugs]

The numbers make sense except for that pesky inflation. The 30% price correction up front is balanced out with another 10%+ or more correction in the way of inflation. The net result is the same either way.

That’s the problem with the Soft Landing. They aren’t making any distinction between PRICES and VALUE. If prices remain flat for 10 years the value of those prices have still declined just as much as if there had been a correction because of the effects of inflation on the dollars that comprise the price.

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